Machine Gun Economics

Andrew Snyder writes: The soldier’s hands never moved from the butt of the machine gun as his patrol slowly passed by. And yet nobody in the camo-clad group would make eye contact with me. It was a sign their duty was symbolic – true killers wouldn’t mind the life behind a person’s eyes; they only see a target.

But the patrol did its job. As the soldiers drove off into the dusty Mexican countryside, I was intimidated. I knew the government controlled the streets. And somebody was willing to kill to keep it that way.

The episode in Mexico last week brought the same emotions trudging through my head that I felt during a research tour through Argentina last year. But down there, the killers don’t roam the streets. They take political office.

Argentina’s oh-so-socialist leader Cristina Fernández de Kirchner turned 60 on Tuesday. We bid her a feliz cumpleaños, but we question how many candles to put on the cake. Using the same home-baked equation her government uses to gauge the national inflation rate, Kirchner becomes the world’s most powerful five-year-old.

The age seems to fit. If you’ve been following news of the southern hemisphere, you know the Argentine president just did something really childish.

She locked grocery prices for 60 days.

You see, Argentina’s inflation rate is somewhere in the neighborhood of 25%. (However, the government’s math puts it at just 10%.) So to keep her populist voters happy, she told the likes of Walmart (NYSE: WMT), Disco, Jumbo and other large supermarket chains to stop boosting their prices.

Yep… machine gun economics. That’ll fix it.

We know it won’t work. And I’m sure she knows it won’t work. But Kirchner is a politician, so she does what all politicians do… whatever gets the most votes.

I hate to borrow someone else’s thoughts, but Forbes contributor Paul Roderick Gregory says it too well not to pass it along:

“Cristina Kirchner’s Argentina illustrates an alarming trend. Her government has expropriated major foreign investors, falsified statistics, destroyed central bank independence, used the nation’s currency reserves for political payoffs, and faces default. Yet she was easily reelected, just as her neighbor Hugo Chavez, whose gross mismanagement of Venezuela’s economy may be unmatched in Latin America. Barack Obama was reelected in the United States despite the worst recovery of the postwar era. All offer populist programs, which seems to buy them a pass at election time.”

This isn’t a swipe at any particular party or political mindset. It’s a shot at all politicians. They’re all as guilty as the fat kid sitting beside an empty cookie jar.

Take, for instance, the looming budget cuts from Washington on March 1. Let me remind you that the “meat-cleaver” reductions we face in less than two weeks are the lingering results of Congress’ version of compromise… from the 2011 debt-ceiling fight.

We are still dealing with this nonsense (and all the uncertainty it spawns) for one simple reason… Politicians live on votes.

They will never bite the hand that feeds them.

Populist Pleasure
It’s the reason Kirchner stole YPF from Spain’s Repsol (OTC: REPYY) last year. Gasoline prices in the country were rising because YPF was sending its supplies to Chile (where less regulation led to higher profits). So the Argentine president seized the company.

Now the government decides where the energy flows.

And votes are also the reason that, despite sitting on the fourth-largest shale deposit in the world, Mexico is on par to become a net energy importer by 2018.

Most folks don’t realize it, but the Mexican government (which hires the men with the big guns) gets roughly a third of its annual revenue from the sale of oil. But that creates a big problem for the state-owned oil producer, Pemex.

With the government picking the company’s pockets for its political needs at a faster and faster clip, Pemex has had trouble funding fresh exploration projects. As a result, the world’s No. 7 oil producer has seen its crude output decline about a quarter in the last decade.

There’s clearly a need for outside help. But a set of fine politicians added a clause to Mexico’s constitution in 1938 that says only the state is allowed to search and drill for oil and gas.

If Mexico City doesn’t make major changes, the country will be a net oil importer in five years.

But if the government allows outsiders to come in… Well, they’ll likely need a few more guns in the street to keep the unions and their workers at bay. The voters won’t be happy.

My point with these examples is simple. One way or another, the government controls the streets. It doesn’t matter where you live. I could pull similar anecdotes from any country on the planet.

It’s the nature of the beast.

It’s an important lesson right now, because later this week, we’ll be up to our eyeballs in political rhetoric. Nobody from the Right or the Left will miss an opportunity to get their talking points in front of their constituents as the budget-cut debate heats up once again.

Their goal is to show us they are in charge. It’s the American version of machine gun politics.

But just like the highly armed soldiers I came across last week in Mexico, the politicians in Washington will refuse to make eye contact – their words are purely symbolic.

As investors, we can’t let the hyperbole intimidate us. American markets are about to swim into another wave of opportunity-inducing volatility. But good companies will still make money… even in Argentina and Mexico.

In other words, don’t be intimidated by the government’s heavy artillery.

Just nod and let the guns pass by.

Good investing,

Andrew

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